How Congress Could Close Social Security’s Funding Shortfall — and What It Could Mean for You

Quick Read

• Social Security is projected to face a funding shortfall that could lead to a 22% benefit reduction for seniors if lawmakers do not act.

• Lawmakers could raise the 6.2% payroll tax or remove the $184,500 wage cap, but both options could increase employer costs and pressure jobs or workplace benefits.

• Increasing the full retirement age beyond 67 could bring in more payroll revenue, though it would hit workers in physically demanding jobs the hardest.

• Americans who work with a financial advisor have saved more than twice as much for retirement, on average. Find out what one could change for you: SmartAsset's free quiz matches you with up to three vetted fiduciary advisors in about five minutes. (Sponsor)

If Social Security has been in the headlines, the news likely has not been encouraging. The program is dealing with a sizable funding gap that could produce a broad 22% cut in benefits within about six years.

That would be devastating for millions of seniors who depend on those payments for income. Still, benefit cuts are not inevitable. Congress has several ways to address the program’s projected financial shortfall.

Below are three widely discussed fixes and how each could affect workers and retirees.

1. Raising the payroll tax rate

Payroll taxes are Social Security’s primary source of revenue. Workers contribute 6.2% on earnings up to $184,500, and employers pay an equal 6.2% match.

Congress could increase that 6.2% rate for both workers and employers, which would directly send more money into the program.

The drawback is obvious: higher taxes could strain workers who are already stretched thin. Employers would also face higher labor costs, which could prompt spending cuts, fewer jobs, or reductions in employee benefits.

Retirement savers are often told to rely on personal savings to supplement Social Security. If companies reduce or eliminate 401(k) matches to offset higher payroll costs, that could weaken Americans’ retirement progress.

Americans say they need $1.46 million to retire comfortably. Whether that figure works for your situation comes down to three questions many people never fully answer:

• 1. How much can you withdraw each year without running out?

• 2. When should you claim Social Security?

• 3. How much will taxes take from your 401(k) or IRA?

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2. Raising the Social Security wage cap

Workers do not pay Social Security taxes on all earnings automatically. As noted above, wages above the $184,500 cap are exempt from Social Security taxes.

Congress could lift that cap or eliminate it altogether. Like a higher payroll tax rate, that would provide Social Security with an immediate cash boost.

While a higher wage cap would affect fewer people than a broad tax increase, employers would still share some of the burden. That could lead to lower business spending and slower economic activity.

3. Increasing Social Security's full retirement age

Full retirement age, or FRA, is the age at which workers can collect their full Social Security benefit. For anyone born in 1960 or later, FRA is 67.

That matters because benefits can be claimed as early as 62, but taking them before FRA reduces the monthly amount. A significant cut can make retirement much harder financially.

Congress could raise FRA to 68, 69, or even 70. As people live longer, that change could be seen as reasonable. It would also keep more people working longer, which could increase payroll tax revenue for Social Security.

The downside is that many people cannot realistically keep working longer. Those in physically demanding jobs, for example, may not be able to stay on the job for several more years. If they are forced to claim early, their retirement income would suffer for the rest of their lives.

In the end, lawmakers have several ways to deal with Social Security’s financial problems. But the most popular ideas all come with trade-offs that are difficult to ignore, so Congress will need to weigh each one carefully.

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